Consolidated statement of changes in shareholders’ equity
18. Financial instruments Financial risks
In the normal course of business the Group is exposed to credit risks, liquidity risks, interest rate risks and foreign currency risks. The overall risk management policy focuses on the unpredictable nature of the financial markets with emphasis on minimising any negative impacts on the financial performance of the business. The Group closely monitors its financial risk linked to its activities and the financial instruments it uses. However, as the Company is a long term property investor, it believes that the funding of its investments should also be planned on a long term basis reflecting the overall risk profile of the business.
Credit risk
The credit risk is defined as the unforeseen losses on assets if counterparties should default. The risk related to the possible defaults of the Group’s counterparties is minimised by dealing directly with a number of reputable banks for all its borrowings, interest rate swaps, foreign exchange contracts and deposits. These banks have a credit rating of A– (36 per cent), A (12 per cent), A+ (26 per cent), AA- (25 per cent) and BBB (1 per cent)
according to Fitch; and A3 (36 per cent), A2 (25 per cent), Aa3 (25 per cent), Aa2 (10 per cent), A1 (3 per cent) and Baa3 (1 per cent) according to Moody’s. The credit risk associated with lease debtors is determined through a detailed analysis of the outstanding debt and mitigated by requiring deposits, upfront payments or bank guarantees from tenants to cover rents for a limited period. The risk is further reduced by investing in mature markets and by choosing major tenants also on the basis of their financial strength.
The carrying amounts of the financial assets represent the maximum credit risk. The combined carrying amount on the reporting date was made up as follows:
Carrying amount of financial assets Note
30-06-12
€’000
30-06-11
€’000
Receivables 14 29,939 29,094
Derivative financial instruments 6 5,933
Cash and deposits 15 120,954 112,976
150,899 148,003 The ageing analysis of the rents receivable on the balance sheet date was as follows:
Rents receivable
30-06-12
€’000
30-06-11
€’000
Overdue by 0–90 days 14,128 17,019
Overdue by 90–120 days 33 47
Overdue by more than 120 days 2,159 1,570
16,320 18,636
Financial Statements 2011/2012
Eurocommercial Properties N.V.
105
Movements in the provision for bad debts in the current financial year were:
Provision for bad debts
30-06-12
€’000
30-06-11
€’000
Book value at beginning of year 1,026 1,069
Added 472 484
Released (283) (527)
Book value at end of year 1,215 1,026
With respect to the rents receivable, the Group holds rental deposits from its tenants totalling €8.5 million (2011: €8.6 million) in addition to bank guarantees.
Liquidity risk
In order to reduce liquidity risk the repayment dates of borrowings are well spread over time and 92 per cent of borrowings are long term with 38 per cent of borrowings with a remaining term of more than five years. The Group aims to enter into long term loans, preferably ten years or longer. At the balance sheet date the average maturity of the borrowings was six years. Group borrowings will not exceed the adjusted net equity of the Company, so that the debt to equity ratio is less than one, which further mitigates risk. The ratios to which the Group has committed itself are monitored at regular intervals. Apart from these obligations and commitments, The Netherlands fiscal investment institution status of the Company imposes financial limits.
The following table shows the undiscounted cash flows required to pay its financial liabilities:
30-06-12 30-06-11
Undiscounted cash flows
Total
Non-current borrowings* 1,153,047 0 673,810 479,237 1,039,405 0 505,171 534,234
Current borrowings 103,603 103,603 0 0 71,724 71,724 0 0
Interest derivative financial instruments 219,320 23,442 88,916 106,962 196,613 22,944 90,533 83,136
Interest on borrowings 170,514 29,597 93,561 47,356 163,827 25,774 87,037 51,016
Non-current liabilities 9,982 1,857 4,804 3,321 9,846 2,329 2,658 4,859
Other creditors 57,251 55,815 1,430 6 55,805 54,018 1,787 0
1,713,717 214,314 862,521 636,882 1,537,220 176,789 687,186 673,245
*Non-current borrowings including amortisation.
Foreign currency risk
Due to the Swedish property investments the Group is exposed to the Swedish krona, the only significant foreign currency exposure for the Group.
However, due to SEK loan facilities with major banks this exposure is partly hedged.
SEK borrowings amount to €317.4 million (30 June 2011: €279.9 million). The total property investments in Sweden are €689.9 million (30 June 2011: €632.8 million) so 46 per cent of this SEK exposure is hedged through these borrowings at 30 June 2012 (30 June 2011: 44 per cent).
The remaining exposure is relatively limited compared to the total size of the portfolio and will, in principle, not be hedged. A weakening of this currency by 5 per cent would result, for example, in a decrease of shareholders’ equity of only 1.4 per cent of reported net asset value and in a decrease of only 1.3 per cent of reported direct investment result.
The Group also has a small foreign currency exposure of approximately £5 million to the British pound as a result of company expenses relating to the London office and staff.
Interest rate risk
It is the policy of the Company to operate a defensive interest rate hedging policy by using derivatives to protect the Company against increases in interest rates. The Company intends to hedge the majority of its loans outstanding for the medium to long term (five to 15 years). The fair value (mark to market) of the current interest rate hedge instruments as at 30 June 2012 is a negative value of €148.6 million (30 June 2011: negative
€54.4 million).
The interest rate hedge instruments as at 30 June 2012 have a weighted average maturity of eight years and the Company is hedged at an average interest rate of 3.7 per cent excluding margins (30 June 2011: 3.9 per cent). Only 17 per cent (30 June 2011: 9 per cent) of the total borrowings is at a floating rate without interest hedge. An increase in interest rates of 1 per cent would therefore only have a limited negative impact of an additional annual interest expense of €1.60 million (30 June 2011: €1.02 million) or 2.01 per cent (30 June 2011: 1.32 per cent) of reported direct investment result.
If at 30 June 2012 the euro interest curve and the Swedish interest curve were 50 basis points higher, the fair value movement for derivative financial instruments would have increased the shareholder’s equity by €36.8 million. If the interest curves were 50 basis points lower, the fair value movement for derivative financial instruments would have decreased the shareholder’s equity by €38.5 million. Both calculations assume that all other variables were held constant.
Financial Statements 2011/2012 Eurocommercial Properties N.V.
106
Maturity profile
Derivative financial instruments
30-06-12
From one year to two years 24,399 (7,714) 42,700 (3,169)
From two years to five years 236,042 (34,854) 149,000 (18,723)
From five years to ten years 584,814 (80,030) 663,532 (33,979)
Over ten years 80,000 (23,682) 90,000 2,309
935,255 (148,569) 945,232 (54,446)
FX forward contracts 1,596 (47) 886 3
936,851 (148,616) 946,118 (54,443) Derivative financial instruments comprise the fair value of interest rate swap contracts entered into to hedge the Group’s interest rate exposure and FX forward contracts to partly hedge the Company’s exposure to the Swedish krona net rental cash flows.
In addition to the notional amounts of the derivative financial instruments presented in the table above, the financial instruments portfolio as per the balance sheet date included forward starting interest rate swaps to extend existing interest rate swaps then maturing for a notional amount of
€290 million (2011: €276 million), forward starting interest rate swaps for a notional amount of €48 million (2011: €61 million), interest rate caps for a notional amount of €70 million (2011: €35 million), basis interest rate swaps swapping 3 months Euribor for 1 month Euribor for a notional amount of
€230 million (2011: €270 million), swaptions for a notional amount of €20 million (2011: €0 million) and forward starting currency collars for a notional amount of €4 million (2011: €3 million). Although the notional amounts of the aforesaid financial instruments are not included in the table above, the fair value of these financial instruments is reported in the table above.
The Company accounts for the purchase/sale of an interest rate swap at its transaction date.
Derivative financial instruments 30-06-12 €’000
30-06-11
€’000
Book value at beginning of year (54,443) (103,677)
Unrealised fair value movement interest rate swaps (93,106) 49,988
Unrealised fair value movement FX forward contracts (3) (93)
Exchange rate movement (1,064) (833)
Prepayments on instruments 0 172
Book value at end of year (148,616) (54,443)
Effective interest rate
The following table shows the effective interest rate (variable rate is based on Euribor/Stibor as at 30 June 2012) on financial assets on which interest is receivable and liabilities on which interest is payable as at the balance sheet date, together with an ageing analysis according to interest rate revision dates.
30-06-12 30-06-11
Effective interest rate (%) 2.00 4.03 3.26 1.02 2.32 4.3 3.85 1.58
Up to one year (€’000) 101,267 2,337 10,000 10,000 70,437 1,286 0 0
From one year to two years (€’000) 117,129 2,337 24,399 24,399 27,989 1,325 42,700 42,700
From two years to five years (€’000) 547,336 7,010 236,042 236,042 471,523 4,334 149,000 149,000 From five years to ten years (€’000) 293,891 99,343 584,814 584,814 308,200 57,368 663,532 663,532
Over ten years (€’000) 86,000 0 80,000 80,000 168,667 0 90,000 90,000
1,145,623 111,027 935,255 935,255 1,046,816 64,313 945,232 945,232 The following table shows the periods in which the interest cash flows (variable interest is based on Euribor/Stibor as at 30 June 2012) on both borrowings and derivatives are expected to occur on the basis of the loan and interest rate swap agreements entered into by the Group, as per the balance sheet date:
Interest cash flows
Borrowings floating rate
€’000
Total
€’000
Up to one year 25,122 4,476 34,140 (10,698) 53,040
From one year to two years 23,744 4,476 35,114 (11,058) 52,276
From two years to five years 51,914 13,427 95,754 (30,895) 130,200
From five years to ten years 28,148 11,326 77,391 (23,896) 92,969
Over ten years 7,882 0 67,172 (13,705) 61,349
136,810 33,705 309,571 (90,252) 389,834
Financial Statements 2011/2012
Eurocommercial Properties N.V.
107
Fair value of financial instruments
The financial statements have been prepared on an historical cost basis, except for property investments, property investments under development, property investments held for sale and some of the financial instruments, which are carried at fair value. The categories of financial instruments in accordance with IAS 39 are: A. Assets and liabilities at fair value through profit or loss, B. Loans and receivables, C. Available-for-sale financial assets, D. Financial liabilities measured at amortised cost.
The carrying amounts of the financial instruments and their fair values were as follows:
30-06-12
amount Fair value
Carrying
amount Fair value
Receivables 14 B 29,939 29,939 29,094 29,094
Derivative financial instruments (assets) A 6 6 5,933 5,933
Cash and deposits 15 B 120,954 120,954 112,976 112,976
150,899 150,899 148,003 148,003
Creditors 16 D 75,678 75,678 72,912 72,912
Borrowings 17 D 1,252,744 1,259,166 1,107,964 1,107,998
Derivative financial instruments (liabilities) A 148,622 148,622 60,376 60,376
1,477,044 1,483,466 1,241,252 1,241,286 The fair values of the financial instruments were determined as explained in the principal accounting policies (note 1) to the extent that for those borrowings with a fixed interest rate, a model was used assuming that those borrowings are at a floating rate and have interest rate swaps at the fixed coupon level. All other balance sheet items are short term and are therefore not adjusted to their fair value.
Fair value hierarchy
The following table shows an analysis of the fair value of derivative financial instruments recognised in the balance sheet by level of the fair value hierarchy:
Level 1
Total fair value 30-06-12
€’000
Total fair value 30-06-11
€’000
Derivative financial
instruments 0 0 (148,616) (54,443) 0 0 (148,616) (54,443)
All derivative financial instruments are at level 2: the counterparty uses a model to determine the fair value with inputs that are directly or indirectly observable market data.